Just hours before leaving for Washington Israeli PM meets Palestinian leader meet in Jerusalem, reiterate commitment to reaching peace deal by end of 2008. Sources say Palestinians complained against continued settlement construction

Israeli officials said that during Monday's meeting between Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas in Jerusalem progress was made on the issue of the permanent borders of a future Palestinian state and the security arrangements a peace agreement would entail.

The preliminary meeting was also attended by the heads of the negotiation teams - Foreign Minster Tzipi Livni and Ahmed Qureia – as well as by Olmert aides Yoram Turbovitch and Shalom Turgeman. Olmert and Abbas later held a one-on-one meeting.

According to Israeli sources familiar with the talks, both sides reiterated their commitment to reaching an agreement by the end of 2008.

During the meeting Olmert expressed his discontent over the letters sent by Palestinian Prime Minister Salam Fayyad to the European Union and the Organization for Economic Co-Operation and Development (OECD) claiming that European-Israeli ties should not be boosted in light of Israel's settlement policy in the West Bank.

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Israel is looking to become a member of both the EU and the OECD.

"We do not accept the use of this rhetoric, which does not reflect the current relationship between Israel and the Palestinian Authority," Olmert said during the meeting.

The Palestinians on their part protested the continued construction of settlements. The Israeli PM said in response that the construction in east Jerusalem's Jewish neighborhoods would continue, as will construction in areas that are expected to remain in Israeli hands after an agreement is reached.

The Palestinian negotiators asked that Israel consider releasing more prisoners and demanded added Palestinian police presence in the West Bank.

Olmert also updated Abbas on the Egyptian-mediated talks on a possible ceasefire with terror groups in Gaza and said no agreement has been reached as of yet. Sources in the PM's office said Abbas expressed his support for the renewed peace negotiations between Israel and Syria.

In a recent interview with The Associated Press, Salam Fayyad said he was deeply pessimistic about a peace deal with Israel, saying Israel's accelerated settlement construction largely strips the negotiations on the terms of Palestinian statehood of meaning.